The demand for good X is estimated to be Q_x^d = 10,000 − 4P_X + 5P_Y + 2M + A_X, where P_X is the price of X,P_Y is the price of good Y,M is income,and A_X is the amount of advertising on X.Suppose the present price of good X is $50,P_Y = $100,M = $25,000,and A_X = 1,000 units.Based on this information,good X is: A) an inferior good. B) a normal good. C) a Giffen good. D) a regular good.

Question

Quizplus · Accepted Answer

Since the demand for good X increases as income (M) increases, it is a normal good. Additionally, the positive coefficient on the price of good Y (P_Y) indicates that good X and good Y are substitutes, meaning that if the price of good Y increases, consumers will switch to buying more of good X. Finally, since the price coefficient is negative, the quantity demanded of good X will decrease as the price of good X increases, which is consistent with the law of demand. Therefore, good X is a normal good.

The Demand for Good X Is Estimated to Be Qxd

The Demand for Good X Is Estimated to Be Q_x^d